Masterworks Review: Investing in Fine Art
My mother owned an art gallery for nearly 40 years, and I literally grew up surrounded by art.
Because of my background in the art world, I was both intrigued and a little wary of this new investment platform. Masterworks allows regular joes to buy shares of art masterpieces as an investment.
My personal finance side is excited to see a platform open up an asset class that is generally out of reach of the average investor. However, my art-loving soul cringes a little at the idea of considering artwork to be a financial investment.
Here’s what I learned about how Masterworks works and whether it could be a good investment for the aspiring art collector:
How It Works
The program treats artwork like any other asset whose shares can be traded as a qualified security. This process is similar to how one invests in any number of various asset classes. Except in this case, the asset is a piece of artwork.
Masterworks buys a painting, files it as a qualified security offering with the Securities and Exchange Commission, and then sells shares to investors. Currently, shares are priced at $20/share, and the minimum investment is $1,000.
But just because the process is similar to more common investments does not mean that investing in a share of a masterpiece painting is just as simple. There are a number of issues that a potential Masterworks investor needs to understand before signing up:
1. How is the artwork valued?
Beauty is in the eye of the beholder, and while some might see a Jackson Pollock painting as a revolutionary expression of the human condition, others might just see it as paint dribbles on a canvas. Commercial real estate’s value can be determined by things like potential income or market comparison. However, artwork’s value is solely determined by the amount of money someone is willing to pay for it.
So how exactly does Masterworks know that it is buying paintings that will increase in value?
According to Masterworks’s website, “the team selects paintings based on a review of sales data for similar works with historical appreciation rates between 9-15%.” Masterworks states that they focus on what’s known as “blue chip” art. This means it’s defined as art produced by the top 100 artists whose work is reliably profitable. These are the artists whose names are known even among non-aficionados: artists such as Van Gogh, Kahlo, and Basquiat.
Masterworks is focusing on the pieces that are sold at auction for millions of dollars. These works are out of reach of the average investor and are likely to increase in value.
That being said, the art world is more fickle than real estate investing. That’s partially because art is a luxury rather than a necessity, meaning it can lose value when the economy as a whole is doing poorly because there are fewer people who can afford it. In addition, the art world is subject to trends, just like any other aspect of culture, and once-revered artists and art can lose prestige.
2. This is an illiquid investment
Masterworks hopes to be able to facilitate trading or sales through brokerage relationships at some point, it makes no guarantees that it will be able to offer such a trading market. This means that the only way to recoup your invested money is if the painting sells.
And therein lies at least two more potential difficulties.
First, the painting will only sell if a collector makes an offer for it. Depending on the economy, art world trends, and other issues that are outside of the control of the shareholders, collectors may or may not be interested in the painting you partially own.
Second, if a collector makes an offer, the shareholders must vote on whether or not to sell. The platform prohibits any shareholder from owning more than 10% of any particular piece to ensure that shareholder voting is reasonably democratic.
This means Masterworks should be no more than a small part of any investor’s portfolio. Between the (currently) non-existent options for offloading your shares in case of a financial emergency, and the fact that you only have little control over whether or not to sell, this should definitely not be a major part of your investment plan.
According to the Masterworks website, the company intends to treat the paintings as a long-term investment. They intend to hold each painting for at least five to 10 years. Do not invest any money you can’t afford to have tied up for that long.
Related: What You Need To Know About Asset Allocation
3. Understand the fee structure
As with any investment, you want to make sure you know how much it will cost you to be an investor in Masterworks. Some of the fees are typical, but others might surprise you.
To start, you will pay a 1% annual management fee, which covers insurance, storage, and transportation. This is in line with the annual fee you might pay for assets under management in a typical investment vehicle.
In addition, Masterworks will keep 20% of any profit made from the sale of a piece. This will reduce your profit margin. But it does also provide a kind of insurance to investors that Masterworks is purchasing pieces that will appreciate in value.
The toughest fee to swallow, however, is the 10% upfront fee that investors pay upon initial buy-in. Such a fee reduces your annualized return over time. It makes an investment in artwork no better financially than an investment in index funds–and it could potentially make your return worse than what you’d see from an index fund.
Related: The Best Robo Advisors To Automate Your Investing
4. Will the artwork be displayed?
As of right now, Masterworks only owns two pieces: Andy Warhol’s 1 Colored Marilyn, purchased for just over $1.8 million, and Claude Monet’s Coup de Vent, purchased for approximately $6.24 million. I was somewhat concerned that there was no information on the Masterworks website about where these pieces are currently housed.
I put in a call to the Masterworks office and spoke to Candy Light, one of the investor relations professionals on the Masterworks team. She told me that both paintings are currently in a climate-controlled professional fine arts storage facility in Delaware.
In addition, Ms. Light let me know that the company intends to eventually open a Masterworks gallery in New York to display all of the artwork owned by shareholders. This gallery will be free and open to the public. It will be set up like a traditional gallery, with one exception: beside each piece will be an iPad or tablet that will provide visitors with information about the piece’s financial performance as an investment.
I also asked Ms. Light about what kinds of protections are in place for the paintings in case of anything from vandalism to fire to Sean Connery and Catherine Zeta-Jones teaming up for a heist. She assured me that each painting is fully insured through AIG against theft or damage.
5. How to Sign Up
It’s still early days for Masterworks. Though the company has filed with the SEC to have both of their current pieces qualified, it has not yet happened for either the Warhol or the Monet. So, anyone signing up right now is merely making a “reservation” to buy shares in either of the current pieces.
Right now, you can sign up to reserve shares. Or if you aren’t ready to commit just yet, you can sign up to receive updates from Masterworks. This will allow you to decide in the future if you want to invest.
Should Art be Considered an Investment?
There are two ways of responding to this question: the practical, and the emotional.
On the practical side, considering art to be an investment can be a risky proposition. If you do not understand what you are investing in, you will have to rely on luck and other people to know if you are making a good investment.
Just as Warren Buffett advises investors to only put money in things they understand, I would recommend that would-be art investors only put money into an art investment that they understand.
That being said, the Masterworks platform has democratized art investing. It’s allowing average folks who don’t know much about art to own a piece of something beautiful.
This brings me to the emotional question as to whether art should be an investment.
I personally believe that art is meant to be enjoyed, and that money is a poor indicator of what makes art valuable. Treating art as an investment can make it difficult to evaluate the value of a piece because you are putting a financial valuation on an emotional response.
One of my favorite memories from early adulthood was going to the Musee d’Orsay in Paris with my mother, where she saw Whistler’s Mother in person for the first time. She got tears in her eyes and explained to me that although she’d studied the piece and thought she knew it well, seeing it in person truly allowed her to see its complexity and emotion in a way she had not expected.
Whistler’s portrait touched her in a way that only art can, and there is no price she could put on that experience.
However, I personally know just how thrilling it is to buy a piece of artwork that appreciates in value. In 2005, my husband purchased this oil painting by artist Roman Nogin from my mother’s gallery for $2,000. (Full disclosure: there was a future-son-in-law discount on that price). In the years since the purchase, Nogin has become a rising star in the art world, and this piece’s value has gone up. It is currently worth between $10,000 and $12,000.
Despite the piece’s increased value, however, we have no plans to sell it. My husband bought this piece because he loves it and we display it in our home because it brings us joy. Money is not part of that equation, even though my husband is immensely proud of his discerning eye.
But just because I personally don’t believe that art should be considered an investment doesn’t mean you shouldn’t. Fine art has been bought and sold for incredible sums for hundreds of years, and in 2018, investments in fine art outperformed investments in treasury bonds, gold futures, and the S&P 500.
Should You Invest in Masterworks?
Quite frankly, I don’t believe that an investment in Masterworks should be part of your retirement or wealth-generation plan. But that does not mean there is no place for a Masterworks investment in your portfolio.
There is power in owning a piece of something important. That sense of power is why people like to frame decorative stock certificates, and why owning a share of Apple or Disney can give you a sense of pride anytime you use one of their products. Owning stock in a company means that you are a co-owner of something amazing.
And that is the frame of mind I believe potential Masterworks investors should have. Owning a Pissarro or a Degas is out of the reach of the average art-lover, but through Masterworks, it is possible to own a share of a beloved masterpiece–and maybe even earn a decent return on your financial investment.
If Rene Magritte’s Le Fils de l’Homme were ever to be acquired by Masterworks, I will be first in line to buy a few shares, because it would mean part ownership of a piece that I love. That would be exhilarating, as would seeing my financial investment in that piece grow over time.
Masterworks can be a great way to invest a small portion of your portfolio, but it can’t replace the meat-and-potatoes investments that are known quantities in your wealth generation plans. This program offers investors the ability to own an important piece of culture, but it would be a mistake to view it as a way to get rich–or even retire securely.
Would you invest in artwork through Masterworks? What famous piece of art would you most like to own a share of?
